Why Investing in Out‑of‑State Properties Can Boost Your Portfolio

Real estate continues to be a compelling option for wealth building — whether residential, commercial or multi‑family. Unlike stocks or bonds, property offers tangible value. And when you expand beyond your home market, out‑of-state properties unlock new opportunities and risks you must understand.

The Advantages to Out-of-State Investing

Investing in out-of-state properties can offer unique benefits that help real estate investors build stronger, more flexible portfolios. While depreciation and depreciation recapture rules still apply, diversifying geographically can open up new opportunities for growth and risk management.

Lower Entry Costs and Increased Buying Power

Property values and land prices vary greatly from one market to another. In many cases, your investment capital can go further in a different state, allowing you to purchase larger or higher-quality properties than you could in high-cost areas. This expanded buying power can make it easier to scale your portfolio.

Long-Term Growth and Market Opportunity

Emerging or less saturated markets may present stronger long-term value growth potential. By identifying these areas early, investors can position themselves for appreciation and income opportunities that may not be as readily available in mature markets.

Improved Cash Flow and Risk Diversification

Investing in properties that offer stable rental income can provide consistent cash flow to support your broader financial goals. Owning real estate in multiple states also helps spread risk. If one regional market underperforms due to economic or environmental changes, your portfolio is less likely to be severely affected.

Early Access to High-Potential Markets

Entering a growing market before it becomes widely recognized can result in more favorable purchase terms and increased return potential over time. Strategic out-of-state investing allows you to act on market trends and take advantage of conditions that may not exist in your local area.

Challenges & Pitfalls to Watch Out For

Property as an investment vehicle takes considerable effort up front. The burden of buying, preparing and managing a property only increases for out-of-state investors. Many new property owners aren’t adequately prepared.

If you’re considering an investment in out-of-state properties, be sure to avoid common investing pitfalls. Here are a few tips to remember:

• Get familiar not only with the property, but the local markets and economy as well. Local trends often have a much bigger impact on housing markets than national trends.
• Find and hire a property management company with reasonable fees. These costs will recoup themselves in peace of mind. Work with a licensed, bonded property management firm to reduce your liability and potential exposure to fraud.
• Be mindful of when and how you’ll visit out-of-state properties. Never buy sight unseen, and make routine visits to gauge the condition or be present for things like improvements. Remember, travel is a deductible expense for property investors but does have a negative impact on your ROI.
• Find a trustworthy lender with a presence in the local market. Out-of-state buyers could potentially face higher mortgage interest and down payment requirements because lenders considering them riskier borrows.
• Planning on listing your property on Airbnb or VRBO? Check with local statutes before investing. Some areas don’t allow these short-term rentals and may more require special homeowners insurance.
• Beware of states that have rent control laws. (California, New York and New Jersey are a few such states.) Do your homework and understand the local laws. They could have a negative effect on your cash flow and ROI.

Beyond these tips, pay close attention to state and local housing laws and the financial challenges that come with them. You should always know state laws pertaining to subsidized rent terms and eviction process, for example.

Understand the Tax Consequences

State Income Tax & Capital Gains: You’ll likely owe income or capital gains tax in the state where the property is located. Many states treat capital gains as ordinary income for taxation purposes.

Double Taxation & Tax Credits: If your home state also taxes your worldwide income, you may owe taxes there too — though many states allow credits for taxes paid to another state. Keep in mind federal limits on state and local tax deductions (e.g., the newly raised $40,000 SALT cap, which phases down for high-income earners).

Withholding on Property Sale: Some states require tax withholding upon the sale of property (often based on gross sale price). Refunds or final reconciliations typically occur when you file state tax returns.

Entity Structuring & LLCs: If you hold property through an LLC or corporation, ensure it’s properly recognized in the investing state. Some states levy franchise taxes or categorically tax LLCs, even with little profit.

Claiming Losses & Carryovers: If an investment becomes underwater, you may deduct operating or capital losses (subject to state rules). Some states restrict loss carryovers or disallow them entirely.

Compliance & Filing Costs: You may need to file state tax returns even in years with minimal income, particularly to preserve loss claims. These compliance costs should be factored into your expected ROI.

Best Practices & Next Steps

1. Do your homework. Research demographics, job growth, zoning trends, vacancy rates and local regulations.

2. Partner with local experts. Property managers, real estate agents, contractors, accountants.

3. Run conservative cash flow models. Always stress test for vacancies, repairs and tax changes.

4. Maintain a reserve fund. Remote investments often demand surprise repairs or travel.

5. Consult a real estate CPA. Tax planning across states can be complex.

If you’re ready to explore out‑of-state properties as part of your real estate strategy, we can walk you through state selection, financial modeling and risk mitigation.

Contact an experienced real estate CPA and we’ll advise you on how to best approach the sale and help protect against tax complications.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.